Self-insurance is increasingly becoming the cost containment strategy of choice among Taft-Hartley Trust Funds providing health and welfare benefits to their participants and their qualified dependents. Successful implementation of this popular strategy requires full understanding of all the risks that will be assumed by the self-insuring Fund and a self-evaluation of the Trustees’ ability to effectively manage those risks. The Fund’s size and financial strength will be key determinants in this regard.

Self-insurance can help trustees achieve efficiencies in four areas. In the July issue of LIFELINES, (1) savings in plan costs and (2) improved cash flow were assessed. Below, (3) benefits to be provided and (4) greater control over the plan are addressed.

3. Benefits to be Provided

Because ERISA preempts state law for the self-insuring Fund, savings are available through benefit design by allowing the self-insured Fund to provide a package of benefits that does not contain all of the benefits required by group contracts. Many state-mandated benefits are costly and significant savings are available in this regard.

There is a substantial risk to the participants of the self-insured Fund, however, concerning terminal liability. Self-insured Funds are generally free to modify or terminate the benefits, provided the Trustees have expressly reserved this right in the plan document. Under a fully insured plan, the insurance company must provide funds for the terminal liability associated with claims incurred but not yet paid upon termination. For the self-insured Fund, only the assets of the Fund are available for this purpose.

If the self-insured Fund has not expressly reserved the right to modify or terminate benefits in order to minimize the financial risk associated with exposure to catastrophic claims, ongoing claims or terminal liabilities, bankruptcy of the small self-insured Fund could be the end result.

4. Desire for Greater Control over the Plan

The self-insured Fund can design and modify all aspects of a self-insured plan without the approval of either an insurance company or the state agency which regulates the terms of insurance contracts. This might involve a desire for greater control over claims administration, investment policy with respect to reserves, the timing of contributions to the plan or the level of contributions themselves. Small self-insured Funds exercising too much control over the plan, however, risk the dissatisfaction of participants when claims are not paid correctly or are even denied.

Other Considerations

Additional risks that must be considered and properly managed in self-insurance include compliance with ERISA disclosure and reporting requirements and funding limits as well as compliance with all applicable federal requirements such as the Health Insurance Portability and Accountability Act (HIPAA), COBRA, the nondiscrimination rules of the IRS and the Family Medical Leave Act, to name a few. Penalties for noncompliance with these requirements can be severe and catastrophic for the small Fund. Any Fund considering self-insurance would be well advised to seek the professional expertise necessary to properly design programs that comply with all aspects of these requirements actuarially, administratively, financially and legally.Most small Funds are best served by purchasing insurance. Because they have a small number of participants, they are unable to accurately predict fluctuations in claims frequency and severity and lack the financial resources to assume the risk of loss on any one participant who exceeds the premiums historically charged to the Fund by a commercial insurer.

In addition, the complexity involved with claims administration, benefit design issues, and legal compliance with federal requirements – in combination with the cost to the small Fund of properly providing these programs and services to their participants and the significant risks associated with non-compliance – may be enough to suggest that the Fund is too small to assume the risks and benefits of self-insurance.

[James Conlon is Principal and Consulting Actuary at Milliman, Inc., an employee benefits consulting firm. He is the Fund’s national health care consultant.]